Dynamic Model of Capital Structure for the Noncorporate Firm

A dynamic model of capital structure for the noncoiporate farm is developed and analyzed. In this model. the probability of bankruptcy increases as the farmer's debt/asset ratio increases. Funds invested outside agriculture earn a risldess rate of return. The farmer/proprietor is also able to obtain a riskless wage from off-fann employment; this wage may differ from the implicit wage received as a farmer. The expected return to equity on the farm depends on the leverage. The model examines the effects on optimal capital snucture of (I) bankruptcy risk. (2) the difference between the riskless rate and the expected renun in agriculture, and (3) the difference between the off.farm wage and the implicit on-farm wage. The third element introduces an incentive for the prq>rietor to change leverage over the proprietor's lifetime; this ocrurs if the difference between the wages is nonzero but C<Xlstant. If the difference between the wages is z.ero, a constant leverage is optimal under reasonable circumstances. The model predicts that older farmers require more leverage to induce them to remain in fanning and that they tend to reduce their leverage as retirement approaches. The model is tested with cross-sectional data.


Issue Date:
1989
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/197663
Page range:
28-34
Total Pages:
7




 Record created 2017-04-01, last modified 2017-08-28

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